on average, and that's if you trade it perfectly.
Busted occurrence. For those patterns that busted, I sorted them into one of three bins: single, double, and three or more busts (triple+). The table shows single busts happening most often followed by double and triple busts. In some other pattern types, we see triple busts coming in second place, so big Ws behave themselves.
Busted and non‐busted performance. Compare the performance for all busted patterns (drops of 15% in bull markets) with the performance of big Ms (not Ws). Big Ms see price drop an average of 17% after a downward breakout, and they act as the proxy for a non‐busted big W.
Busted pattern performance for big Ws is not as good as trading a big M chart pattern. However, if you are lucky enough to trade a single busted big W, then price drops an average of 23% (in bull markets). That's exceptional for a bearish pattern; of course, your mileage may vary.
How can you tell if the big W will single bust (as opposed to double or triple bust)? I'll leave that as an exercise for the reader (translation: I have no idea, but focus on nearby overhead resistance that might turn price down or the timing of an earnings announcement).
Table 7.9 Busted Patterns
| Description | Bull Market | Bear Market |
|---|---|---|
| Busted patterns count | 389 or 18% | 105 or 20% |
| Single bust count | 220 or 57% | 78 or 74% |
| Double bust count | 123 or 32% | 19 or 18% |
| Triple+ bust count | 46 or 12% | 8 or 8% |
| Performance for all busted patterns | –15% | –18% |
| Single busted performance | –23% | –22% |
| Non‐busted performance (big Ms) | –17% | –22% |
Trading Tactics
Table 7.10 shows trading tactics.
Measure rule, targets. Use the measure rule to help determine how far price may rise after the breakout. The lower portion of the table shows the numbers. Before I get there, let me explain how to use the measure rule.
Measure the height of the big W by subtracting the lower price of the two bottoms from the price of the highest peak between the two bottoms. Add the height to the peak between the two bottoms to get a full‐height target. The table says that price will reach that target 74% of the time in bull markets.
If you use different multiples of the height (half, 2×, or 3×), you will see different hit rates. For example, if you like to hold onto a stock and target three times the height, compute the height as already described, multiply it by three, and add it to the breakout price. Price will reach the target 39% in bull markets but only 17% in bear markets.
Stop location. Use Table 7.7 to help determine where to place a stop. You can use a volatility stop, which is based on how volatile a stock is, to locate your stop. Often I'll stick a stop below a nearby minor low and double‐check that with a volatility stop. See the Glossary for details on volatility stops.
Return to launch price. Look back at Figure 7.1. Point A is the launch price. It's the price where the stock begins the decline in earnest, leading down to the big W. Unfortunately, the launch price can be hard to determine in some cases, so I use the measure rule to give better targeting guidance.
Table 7.10 Trading Tactics
| Trading Tactic | Explanation |
|---|---|
| Measure rule | Measure the height of the pattern from the lower of the two bottoms to the high between the two bottoms. Add the height to the high price between the two bottoms. The result is the target price. Large percentage moves will be unlikely. The bottom portion of the table shows how often the measure rule works. |
| Stop location | Place a stop at the location of your choice, using the results in Table 7.7 as guidance. |
| Launch price | Determine where the launch price is and use that as a target. |
| Higher second bottom volume | If the right bottom shows higher volume than the left one, expect better performance (in bull markets). |
| Description | Bull Market | Bear Market |
|---|---|---|
| Percentage reaching half height target | 88% | 77% |
| Percentage reaching full height target | 74% | 55% |
| Percentage reaching 2× height | 53% | 31% |
| Percentage reaching 3× height | 39% | 17% |
| Return to launch price | 70% | 51% |
Table 7.11 Special Features
| Description | Bull Market | Bear Market |
|---|---|---|
| Lower left bottom, performance | 46% | 29% |
| Lower right bottom, performance | 47% | 30% |
| Even bottom, performance | 38% | 34%* |
| Higher left volume, performance | 45% | 31% |
| Higher right volume, performance | 49% | 27% |
| Median days from launch price to left bottom |
